If We Tax Them, Will They Leave? New Research Shows They Won’t

Taxes · Work, Income & Poverty · October 29, 2012 · By Budget Center

One hotly debated policy question in California is whether increasing taxes on the wealthy will spur them to leave the state. That question finally has an answer grounded in rigorous research rather than anecdotes. A new study finds no evidence that millionaires left California after voters approved Proposition 63’s “millionaire tax” in 2004. In fact, contrary to popular claims about the “danger” of increasing taxes on the wealthy, millionaires were actually less likely to leave California after the 1 percent personal income tax surcharge on incomes over $1 million was established. So-called “tax flight” by the wealthy appears to be nothing more than an urban legend.

Charles Varner, doctoral candidate at Princeton, and Cristobal Young, Ph.D., assistant professor of sociology at Stanford, analyzed the full universe of California’s personal income taxpayers – a comprehensive dataset that meets the gold standard for study design – during an 18-year period. Varner and Young looked at “outmigration” rates before and after Proposition 63 for two groups: those whose annual incomes exceeded $1 million and therefore were subject to the “millionaire tax” and those whose annual incomes ranged between $500,000 and $1 million and thus were not subject to the tax. Varner and Young’s analysis shows the exact opposite of what might be expected. Outmigration among millionaires actually declined after the tax increase took effect, and it declined to a greater extent for those with incomes well above $1 million, who had a much larger share of income subject to the tax. “In other words,” the researchers conclude, “the highest-income Californians were less likely to leave the state after the millionaire tax was passed.” The study also found no change in “inmigration” rates before and after Proposition 63 went into effect, suggesting that the measure’s tax increase did not deter high-income earners from moving to the state.

Varner and Young also examined migration rates after a large personal income tax cut in 1996, when California’s top marginal tax rate dropped for single filers with incomes over roughly $100,000 and joint filers with incomes over roughly $200,000. If tax changes influenced migration, then this tax cut should have provided a greater incentive for high-income earners to stay in California and reduced the disincentive to move to the state. Instead, the researchers found “no consistent effect of the 1996 tax cut.” In other words, even tax changes affecting a much broader group of high-income earners appeared to have little or no influence on migration.

While anecdotes about wealthy individuals leaving California often receive significant attention, Varner and Young’s analysis of high-income earners as a whole suggests that taxes simply aren’t a key factor in their decisions about where to live. In part, that’s because modest personal income tax increases tend to represent just a tiny fraction of wealthy individuals’ incomes over time. Varner and Young found, for example, that most Californians with incomes over $1 million in a given year remained millionaires for only a handful of years. This means that in the long run, the typical millionaire would have owed an additional tax equal to just one-tenth of 1 percent of her total earnings – a drop in the bucket that likely would be outweighed by the costs of moving out of state. Like most people, high-income Californians tend to be tied to the state by their work and careers as well as by connections to family and friends. To move just to lower one’s tax bill might mean not only giving up the very source of a high income, but also sacrificing important personal ties.

Varner and Young’s study is particularly relevant at this moment, as Californians prepare to vote on the revenue-raising measures on the November ballot. Specifically, this research refutes a key claim by opponents of Proposition 30: that the measure’s personal income tax increase, which would primarily affect the wealthiest 1 percent of Californians, would drive high-income taxpayers from the state. “Tax flight” by the top 1 percent seems especially unlikely under Proposition 30 given that the measure’s personal income tax increases would be temporary – in effect for just seven years. Proposition 63’s tax increase, in contrast, was permanent. By showing that tax increases targeting high-income earners have no impact on relocation, this new study represents an important contribution to the debate.

The California Budget & Policy Center was established in 1995 to provide Californians with a source of timely, objective, and accessible expertise on state fiscal and economic policy issues. The Budget Center engages in independent fiscal and policy analysis and public education with the goal of improving the economic and social well-being of low- and middle-income Californians.